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CHAPTER 1
The Setting
MARINE INSURANCE AND BILLS OF EXCHANGE
Insurance policies and bills of exchange were unknown to ancient Roman jurisprudence and are the posthumous invention of Jews, according to the remarks of Giovan[ni] Villani in his universal history.
THOUSANDS HAVE READ this passage since it first appeared in print in 1647, yet we still do not know what to make of it. The statement is patently false: Jews invented neither marine insurance nor bills of exchange. Nevertheless, for nearly three centuries, it captured the imagination of a great many authors — some famous and others today regarded as inconsequential but once read widely. My aim in this book is twofold: to demonstrate that this tale of origins was once so well known that it can justly be called a legend and, by understanding its significance and reverberations, to shed new light on Europe's cultural and intellectual entanglements with economic modernity. The quotation claiming that Jews invented marine insurance and bills of exchange is lifted from a compilation of maritime laws assembled with commentary by a provincial French lawyer, Étienne Cleirac, published in Bordeaux under the title Us et coustumes de la mer (Usages and Customs of the Sea). Forgotten as much as the story it relays, this volume, as we will see, was a seventeenth-century publishing success. In this and the next two chapters, I peel back the layers of each historical and textual reference made by Cleirac in the three lines cited above and in the longer segment of commentary — roughly seven pages of printed text — to which they belong. In so doing, I unlock the explicit and, even more crucially, implicit meanings that contemporary readers would have gleaned from this narrative. I begin by describing the characteristics of the two financial instruments that Cleirac invokes, marine insurance and bills of exchange, in order to make clear what his audience would have known about them. Chapters 2 and 3 will then review the bewildering assortment of citations that Cleirac weaves into this tale of origins, including his false attribution of it to the medieval Florentine chronicler Giovanni Villani (d. 1348).
Cleirac's prose is undisciplined even by period standards, as the short excerpts included in the next several page indicate (and they are the least meandering in his commentary!). It is for this reason that I parse his words almost one by one. My exegesis will show that out of a hodgepodge of citations, which range from St. Paul to Matthew Paris, from French chroniclers to Jesuit theologians, from Dante to Ariosto and beyond, his consistent preoccupation emerges: how to distinguish good from bad creditors, and good from bad credit instruments, in an increasingly impersonal market. The legend that Cleirac committed to the printed page proved to be a gripping, if inadequate, answer to the thorny problem of where to draw the line between illegitimate and appropriate credit relations, a problem that the commercial revolution of the Middle Ages had raised and the further diffusion of new credit instruments in the sixteenth century had made impossible to avoid.
My interpretative practice is loosely indebted to symptomatic reading, that is, a reading modality that urges critics to unveil the latent meanings that lie beneath the surface of a text. In so doing, I uncover a powerful discourse that drew from Catholic definitions of usury and adapted them to a seventeenth-century reality in which marine insurance and bills of exchange were widely used. The result, as I will elucidate, had a seductive rhetorical purchase.
Why Marine Insurance and Bills of Exchange?
The passage quoted at the opening of this chapter, which sums up the legend of these financial instruments' Jewish origins, appears in Cleirac's commentary on the first article of the Guidon de la mer (The Standard of the Sea), a set of maritime rules promulgated in Rouen in the mid-to late sixteenth century and reprinted in Us et coustumes de la mer. The Guidon, as the title of its first article — "On the contracts or policies of insurance: Their definition, conformity, and differences from other maritime contracts" — suggests, was devoted to marine insurance. It made no mention of bills of exchange. It was Cleirac who linked the two credit instruments to one another. His argument was historically baseless but had its own logic: after inventing bills of exchange, he claimed, Jews also had to invent marine insurance in order to protect the value of the assets they had left behind — value on which they expected their bills of exchange to be drawn.
Marine insurance and bills of exchange were among the most prized byproducts of the commercial revolution of the twelfth and thirteenth centuries, which, unlike the industrial revolution that followed half a millennium later, was propelled by institutional more than technological change. They made it easier for investors to conduct their business without leaving their home base and formed the connective tissues of European long-distance trade. At the same time, both marine insurance and bills of exchange became the objects of intense theological and canonistic debates concerning usury.
No single person or group invented either of these instruments. Both went through a long period of incubation and incremental evolution, which reached maturity in the sixteenth century. Three trends characterized this formative period in the history of European commercial credit instruments. First, although marine insurance and bills of exchange were designed to facilitate transactions conducted at a distance, considerable variations existed in the local norms that regulated their issuance and use. These variations inevitably generated uncertainty. Second, while marine insurance and bills of exchange became more and more standardized, ordinary, and common over time, they also increased in complexity and sophistication. These developments rendered them opaque in the eyes of the uninitiated. Last, by the early modern period, merchants no longer needed to notarize these (and other) business contracts. In continental Europe, notaries were public officials who charged small fees in return for issuing documents that courts would accept as evidence. Both rich and poor went to notaries to protect their property rights. An exception was made for merchants, who processed too much paperwork to be bothered to notarize each of their obligations, and so their signature appended to a contract styled in conformity with written norms and accepted practices came to suffice as legal proof. After the mid-fourteenth century, bills of exchange, too, ceased to be notarized.
For our purposes, the latter shift had two important consequences. It granted European merchants an unusually high degree of self-regulation, since no other social group in Roman law countries was equally able to certify its own property rights. Moreover, in the cities of western Europe where Jews were allowed to reside as international merchants rather than as pawnbrokers after the late sixteenth century, Jewish merchants were permitted to forgo notarization like all other merchants and to bring their papers before Christian tribunals. This legal framework, designed to make access to the market more generalized, eased commercial credit relations between Jews and non-Jews; at the same time, it also blurred the distinction between the two groups in the eyes of those who did not wish to see that distinction undone.
Marine Insurance
Marine insurance contracts grew out of previous risk-sharing contracts, notably sea loans, which had existed in the Mediterranean since antiquity with the dual function of financing overseas trade and reducing its uncertainty. Premium-based insurance was an innovation of the mid-fourteenth century that soon spread from the Italian maritime republics to other regions of Europe. Its principles were analogous to those of today's insurance. The premium was expressed as a percentage of the declared value of the items that were being insured and generally included the broker's fees. In case of a legitimate loss, the underwriter owed the insured party the declared value of the items that had been insured. By the time Cleirac composed his commentary, it was possible to insure not only cargo but also the ship and its infrastructure, as well as passengers (in case they fell prey to infidel captors), and even to resell the insurance contract to another underwriter.
While sea loans were issued against collateral (whether the ship or its cargo), the price of marine insurance was determined by underwriters on account of their knowledge of vessels, captains, routes, wars, piracy, and other elements affecting the likelihood of an accident at sea. Information was thus key to making a profit, but it was unevenly distributed. Although actuarial computation of mortality trends appeared in the seventeenth century, no public statistics were available for calculating insurance premiums. The incremental standardization and professionalization of the purchase, sale, and litigation of marine insurance offered only partial solutions to structural risks.
Long before Cleirac declared marine insurance a Jewish invention, the terms of most insurance policies were outlined in preprinted forms. In 1524, Florence mandated the adoption of a standard formula and the registration of all policies. After considerable debate over its specifics, a model contract was issued in Antwerp in 1571. In many port cities, licensed bodies of specialized brokers developed alongside courts devoted to adjudicating disputes concerning insurance policies, while statutory norms, treatises, and ordinances on the subject proliferated. A tribunal for lawsuits concerning marine insurance (Kamer von assurantie en avarij, or Chamber of Insurance and Average) was instituted in 1598 by the Amsterdam municipal council and approved by the States of Holland in 1612. Analogous institutions were subsequently created in London (1601), Rotterdam (1614), Marseilles (1669), and Paris (1671). In 1673, France's finance minister, Jean-Baptiste Colbert, proposed the establishment of a chamber of insurance in Bordeaux, where Cleirac resided.
The circulation of printed premium quotations between set locations arguably led to price convergences, and some merchants and ship owners purchased their policies abroad at competitive rates. Modern calculations based on surviving documents suggest that experienced brokers and underwriters knew how to price insurance by the mid-sixteenth century. Expertise, however, varied greatly. Lorraine Daston concludes that "the system for determining the premium ... relied on a combination of experience, intuition, and conventions," rather than on actuarial models. Looking at the very text we are examining here, she observes that "nowhere ... in his comprehensive survey of maritime insurance does Cleirac offer any specific guidelines to pricing." In other words, in the absence of hard facts, an underwriter's know-how, which was largely a measure of his local connections and access to reliable correspondents abroad, mattered a great deal.
Conventional as it was, this system elicited concerns about honesty and transparency. Some merchants tried to insure ships they knew had already been lost, hoping the news had not yet reached their underwriters. Some underwriters spread rumors about the capture of valuable vessels in order to induce ship owners to accept higher premiums. As the speculative character of marine insurance increased, overly confident but sometimes ill-informed investors were drawn into the field and lost fortunes, as happened in Bordeaux during the Franco-Dutch War of 1672–1678. In short, even as it became a fixture of overseas trade, marine insurance continued to disquiet observers. While the instrument helpfully distributed risks across individuals and groups, it retained a similarity to gambling and never dispelled the legitimate fear that certain individuals and groups possessed a disproportionate amount of information on the basis of which they could adjust prices.
Compared to more sober sources, Cleirac's commentary, full of digressions and hyperbole, may appear to exaggerate this fear, but its rhetorical excess is better understood in the context of contemporary regulatory institutions' inability to enforce proper conduct. Even in Amsterdam, the seventeenth-century financial capital of Europe and the city that most resembled an open-access commercial society with equal protection for all its participants, worries that expertise could lead to the emergence of oligopolies surfaced frequently. Until 1772, individual underwriters and brokers dominated the insurance market, while attempts to set up large companies or a centralized office were struck down for fear that they would give rise to serious market manipulation. A guild of insurance brokers was created in 1578, although unlicensed brokers still continued to operate after its appearance. Jewish merchants, who had a significant presence in Amsterdam, were permitted to join the guild only in fixed numbers. In spite of this restriction, some Christian brokers described their Jewish colleagues as either inept or unfair — two common refrains of anti-Jewish polemics of the time. In contrast to these guild records, however, notarial deeds show Jewish merchants to have been well integrated into an insurance market dominated by Christian underwriters. This discrepancy suggests that even in the most tolerant European city, where Jews enjoyed unparalleled freedom of thought and economic action, they still symbolized dishonest competition.
Bills of Exchange
If marine insurance prompted qualms about abuses and oligopolies, bills of exchange elicited even greater apprehension. Singular instruments in the landscape of premodern finance, bills of exchange functioned simultaneously as credit contracts and as means of currency exchange. Those who used them testified to their intricacies. Writing in the mid-fifteenth century, the Veneto-Dalmatian merchant-writer Benedetto Cotrugli (1416–1469) noted that it had taken him two years of practice to learn how to use them. In the 1630s, an English merchant of the Levant Company took it upon himself to jot down "the explanation of the mystery of exchange." His phrasing was perhaps aimed at wooing readers, but since the book was reissued in 1671, 1677, and 1700, there was clearly an audience for such an explication. Even to a jurist as versed in commercial law as Sigismondo Scaccia, bills of exchange appeared to be an "obscure, difficult, and dangerous subject," something akin to "alchemy."
By the time Cleirac set out to write his commentary, bills of exchange were no longer a novelty but had become even more complex than marine insurance. As remittances, their primary function was to transfer funds to a distant location while also ensuring that those funds were made available in the desired local currency. Over time, as we shall see, international bankers also used these bills as speculative instruments involving complicated transactions.
Figure 1.1 illustrates the flow of money in a classic bill of exchange using a bill issued in Lyon in January 1552 and reproduced in figure 1.2. A classic bill of exchange was also known as a "four-party bill" because it involved four parties in two locations. In this case, Averardo Salviati of Lyon needed to remit funds to Rinieri Sernigi in Florence for the purchase of some goods or the settling of a debt. Instead of sending a bag of minted coins across the Alps or down the Rhone River and then on to a ship from Marseilles to Livorno, choices that ran the risk of losing the money either at sea or to robbers, Salviati (the deliverer or remitter) purchased a bill of exchange in Lyon marcs from a local banker, Giacomini & Gondi (the takers or drawers), who had close ties to Florence. The bill ordered the takers' agent in Florence (Niccolò Borgherini, the payer or drawee) to pay a set sum in Florentine currency to Salviati's agent, Sernigi (the payee or beneficiary).
All this elaborate information was condensed into a series of cryptic words on a thin slip of paper that resembled a modern personal check (figure 1.2). A nineteenth-century commentator called these bills "laconic" texts. To many, they also appeared enigmatic. They all followed a technical vocabulary (much indebted to vernacular Italian) and a standardized format (figures 1.3 and 1.4). The expression "per questa prima," for example, meant that this was the first of several copies of the same bill to be issued; each copy was sent via an alternative route to augment the chances that at least one would arrive at its destination, but only one could be cashed. The exchange rate was set at the start of the transaction, even if the payment always occured at a later moment in time — in this case, after thirty-four days. Sometimes a bill would indicate that the payment had to occur at usance (the English rendering of "ad uso," from the Italian word for "custom," usanza), which meant the standard number of days after which a bill came due in each pair of European cities, as reported in printed sheets, commercial newspapers, and merchant manuals.
(Continues…)
Excerpted from "The Promise and Peril of Credit"
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